SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 and 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 1996
Commission file number 1-10184
ABATIX ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 75-1908110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
8311 Eastpoint Drive, Suite 400
Dallas, Texas 75227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Common stock outstanding at August 8, 1996 was 2,083,564 shares.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 39,621 $ 415,867
Trade accounts receivable net of allowance for doubtful accounts of
$399,528 in 1996 and $336,486 in 1995 6,277,685 4,370,595
Inventories 4,167,406 3,088,276
Prepaid expenses and other current assets 213,822 218,187
Deferred income taxes, net 86,242 136,719
------------ ------------
Total current assets 10,784,776 8,229,644
Receivables from officers and employees 68,858 70,577
Property and equipment, net 644,501 593,060
Deferred income taxes 69,466 39,657
Other assets 27,768 43,993
------------ ------------
$ 11,595,369 $ 8,976,931
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 4,837,495 $ 2,631,828
Accounts payable 1,465,453 1,031,481
Net liability of discontinued operations (note 2) - 56,813
Other accrued expenses and current liabilities 747,618 939,031
------------ ------------
Total current liabilities 7,050,566 4,659,153
------------ ------------
Stockholders' equity (note 3):
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,378,814 shares in 1996 and 2,366,314 shares in 1995 2,379 2,366
Additional paid-in capital 2,401,356 2,365,118
Retained earnings 2,988,632 2,487,838
Less cost of 287,350 common shares in treasury in 1996 and 207,100
common shares in treasury in 1995 (847,564) (537,544)
------------ ------------
Total stockholders' equity 4,544,803 4,317,778
------------ ------------
Commitments and contingencies (note 4)
------------ ------------
$ 11,595,369 $ 8,976,931
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 9,028,195 $ 7,712,571 $ 16,685,751 $ 13,702,005
Cost of sales 6,548,265 5,418,488 12,046,464 9,705,439
------------ ------------ ------------ ------------
Gross profit 2,479,930 2,294,083 4,639,287 3,996,566
Selling, general and administrative expenses (2,005,399) (1,610,342) (3,796,170) (3,041,569)
Special credit (note 2) - - 56,711 -
------------ ------------ ------------ ------------
Operating profit 474,531 683,741 899,828 954,997
Other income (expense):
Interest expense (89,619) (64,521) (154,521) (129,726)
Other income, net 11,440 6,118 1,138 10,436
------------ ------------ ------------ ------------
Earnings from continuing operations
before income taxes 396,352 625,338 746,445 835,707
Income tax expense 124,837 263,850 267,196 359,345
------------ ------------ ------------ ------------
Earnings from continuing operations 271,515 361,488 479,249 476,362
Earnings from discontinued operations, net of
tax expense of $8,348 (note 2) - - 21,545 -
------------ ------------ ------------ ------------
Net earnings $ 271,515 $ 361,488 $ 500,794 $ 476,362
============ ============ ============ ============
Earnings per common and common equivalent share:
Earnings from continuing operations $ .13 $ .16 $ .22 $ .21
Earnings from discontinued operations - - .01 -
------------ ------------ ------------ ------------
Net earnings $ .13 $ .16 $ .23 $ .21
============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding 2,146,203 2,241,886 2,158,380 2,261,941
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 500,794 $ 476,362
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 192,223 167,234
Deferred income taxes, net 20,668 (31,215)
Gain on disposal of assets (2,865) (6,528)
Changes in assets and liabilities:
Receivables (1,907,090) (1,099,092)
Inventories (1,079,130) (449,421)
Prepaid expenses and other 9,365 51,840
Net asset/liability of discontinued operations (note 2) (56,813) 173,975
Accounts payable 433,972 365,933
Other accrued expenses and current liabilities (191,413) 186,689
------------ ------------
Net cash used in operating activities (2,080,289) (164,223)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (266,682) (114,169)
Proceeds from sale of property and equipment 25,883 37,100
Advances to officers and employees (24,474) (28,545)
Collection of advances to officers and employees 26,193 13,448
Other assets 11,225 314
------------ ------------
Net cash used in investing activities (227,855) (91,852)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 36,251 25,511
Purchase of treasury stock (note 3) (310,020) (262,379)
Net borrowings on notes payable to bank 2,205,667 583,382
Principal payments on capital lease obligations - (4,719)
------------ ------------
Net cash provided by financing activities 1,931,898 341,795
------------ ------------
Net (decrease) increase in cash (376,246) 85,720
Cash at beginning of period 415,867 150,727
------------ ------------
Cash at end of period $ 39,621 $ 236,447
============ ============
Supplemental disclosure information
Cash paid during the period for: Interest $ 154,521 $ 130,891
Income taxes $ 387,000 $ 255,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation, General and Business
Abatix Environmental Corp. ("Abatix") and its wholly owned subsidiary,
International Enviroguard Systems, Inc. ("IESI"), collectively the "Company",
market and distribute personal protection and safety equipment and durable and
nondurable supplies to the asbestos and lead abatement, industrial safety,
hazardous materials, and construction tool industries. The Company, through
IESI, imports certain products sold primarily through the Company's distribution
system. The sorbent manufacturing business of IESI was discontinued in December
1994 (see note 2).
The accompanying consolidated financial statements are prepared in accordance
with the instructions to Form 10-Q, are unaudited and do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. Certain amounts have been reclassified for
consistency in presentation. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.
(2) Restructuring
On December 15, 1994, the Company announced a formal plan to discontinue the
sorbent manufacturing business of IESI. The Company recorded an estimated loss
on disposal of IESI at December 31, 1994 of $139,487, net of taxes. This
estimated loss on disposal primarily included costs related to the leased
facility, the writedown of fixed assets and inventory to net realizable value
and the estimated loss from operations up to the expected disposal date. As of
December 31, 1995, the balance of the reserve existed primarily to cover the
remaining costs associated with the facility lease, which was to expire
September 1999. Actual costs through March 31, 1996 approximated management's
December 1994 estimates. Sales for the discontinued operations of IESI were
$34,000 and $108,000 for the three and six months ended June 30, 1995,
respectively.
In the third quarter of 1995, the Company incurred a special charge of $80,000
to accrue for future lease commitments resulting from the closure of its
distribution center in Corpus Christi, Texas. The noncancelable lease was to
expire September 1999. Sales and operating losses for the Corpus Christi branch
were $152,000 and $24,000, respectively, for the second quarter 1995. Sales and
operating losses were $227,000 and $30,000, respectively, for the first six
months of 1995.
The Company's lease agreement on the building that was occupied by both the
operations of IESI and the Corpus Christi branch included an option to purchase
the building. In March 1996, the Company purchased this facility and
simultaneously sold the building to a third party. This transaction terminated
the Company's lease obligation. In March 1996, the Company reversed the
remaining reserves resulting in the special credit and the earnings from
discontinued operations.
(3) Stockholders' Equity
In accordance with the Company's stock option plan, certain employees exercised
options totaling 12,500 shares during 1996.
The Board of Directors has approved the repurchase of up to 326,500 shares, of
which 287,350 shares have been purchased through June 30, 1996. No shares of
Company stock were repurchased in the second quarter of 1996.
(4) Contingencies
The Company was named as a defendant in a product liability lawsuit. The Company
has requested and received (1) indemnification under the manufacturer's product
liability insurance and (2) legal representation at the cost of the
manufacturer. As of July 31, 1996, no depositions have been taken, therefore
management is not able to assess the merit of the defendant's case. However, the
Company does not anticipate any material impact on its financial statements as a
result of this litigation.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 1995.
RESULTS OF OPERATIONS
Net sales of $9,028,000 for the three months ended June 30, 1996, increased 17%
or $1,316,000 over the same period in 1995 due to the expansion of product lines
and sales force in several locations.
Gross profit of 27% of sales for the three month period ended June 30, 1996,
decreased from 30% for the same period in 1995 because of increased competition
and lower product rebates and prompt payment discounts.
Selling, general and administrative expenses of $2,005,000 for the three month
period ended June 30, 1996, increased 25% or $395,000 over the same period in
1995. The increase is primarily attributable to higher payroll and other
administrative expenses due to the opening of the Las Vegas facility in December
1995 and the expansion in the Phoenix and Houston branches in late 1995 and
early 1996, respectively. In addition, an increase in selling expenses resulted
from increased gross profit dollars. Selling, general and administrative
expenses for the second quarter of 1996 were 22% of sales compared to 21% of
sales for 1995. These expenses are expected to remain in their current range for
1996.
Interest expense of $90,000 increased 39% from 1995 interest expense of $65,000
because of increased borrowings to fund the growth in accounts receivable and
inventory. The Company's credit facilities are variable rate notes tied to the
Company's lending institution's prime rate. Increases in the prime rate could
negatively affect the Company's earnings.
NET RESULTS
Net earnings for the three months ended June 30, 1996 of $272,000 or $.13 per
share decreased $90,000 from net earnings of $361,000 or $.16 per share for the
same period in 1995. The 25% decrease in net earnings is primarily due to lower
selling prices and higher selling, general and administrative expenses,
partially offset by higher sales volume.
SIX MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1995.
RESULTS OF CONTINUING OPERATIONS
Net sales of $16,686,000 for the six months ended June 30, 1996, increased 22%
or $2,984,000 over the same period in 1995 due to the expansion of product lines
and sales force in several locations.
Gross profit of 28% of sales for the six month period ended June 30, 1996,
decreased from gross profit of 29% of sales for the same period in 1995 due to
increased competition from low-priced competitors and reductions in both prompt
payment discounts and volume rebates.
Selling, general and administrative expenses of $3,796,000 for the six month
period ended June 30, 1996, increased 25% or $755,000 over the same period in
1995. The increase is primarily attributable to higher payroll and other
administrative expenses due to the opening of the Las Vegas facility and the
expansion in the Phoenix and Houston branches. Also, the increase in selling
expenses resulting from increased gross profit dollars. Selling, general and
administrative expenses for the first six months of 1996 were 23% of sales
compared to 22% of sales for 1995. These expenses are expected to remain in
their current range for 1996.
The special credit resulted from the Company exercising its option to purchase
its leased facility in Corpus Christi, Texas, and simultaneously selling the
facility to a third party. The sale of this facility resulted in a reversal of
previously accrued lease obligations. See Note 2 to the consolidated financial
statements.
Interest expense of $155,000 was 19% higher than 1995 interest expense because
of an increased level of borrowings to fund the accounts receivable and
inventory growth. The Company's credit facilities are variable rate notes tied
to the Company's lending institution's prime rate. Increases in the prime rate
could negatively affect the Company's earnings.
DISCONTINUED OPERATIONS
At December 31, 1994, the Company recorded an estimated loss for the shutdown of
its sorbent manufacturing business of IESI of $139,487, net of taxes. This
estimated loss on disposal primarily included costs related to the leased
facility, the writedown of fixed assets and inventory to net realizable value
and the estimated loss from operations up to the expected disposal date. Sales
for the discontinued operations of IESI were $108,000 for the six months ended
June 30, 1995.
In the third quarter of 1995, the Company incurred a special charge of $80,000
to accrue for future lease commitments resulting from the closure of its
distribution center in Corpus Christi, Texas. Sales and operating losses were
$227,000 and $30,000, respectively, for the first six months of 1995.
The Company's lease agreement on the building that was occupied by both the
operations of IESI and the Corpus Christi branch included an option to purchase
the building. In March 1996, the Company purchased this facility and
simultaneously sold the building to a third party. This transaction terminated
the Company's lease obligation. In March 1996, the Company reversed the
remaining reserves resulting in the special credit and the earnings from
discontinued operations.
See Note 2 to the consolidated financial statements for additional information.
NET RESULTS
Net earnings for the six months ended June 30, 1996 of $501,000 or $.23 per
share increased $24,000 from net earnings of $476,000 or $.21 per share for the
same period in 1995. The 5% increase in net earnings is due to higher sales
volume and the reversal of previously recorded reserves (see Note 2 to the
consolidated financial statements), partially offset by lower selling prices and
higher selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the first six months of 1996 of $2,080,000
resulted principally from increases in accounts receivable and inventory,
partially offset by the net earnings, noncash charges and the increase in
accounts payable. Although cash flow from operations at any given point in 1996
may be negative, the entire year is expected to be positive. Several factors
contribute to this expectation. The rate of revenue growth in 1996 is expected
to be higher than 1995, but at a level that can be funded by cash flow from
operations. The Company currently estimates revenue growth of 10 to 15% in 1996.
Growth beyond that range may require borrowing on the working capital line of
credit. In addition, the historical increase in accounts receivable collections
and reduction of inventory in the third and fourth quarters has a positive
impact on cash flows from operations. Finally, the Company anticipates continued
growth in the Las Vegas branch, reducing the amount of cash required to operate
that facility.
Cash requirements for non-operating activities during the first six months of
1996 were for the purchase of property and equipment amounting to $267,000 and
the repurchase of the Company's common stock totaling $310,000. The property and
equipment expenditures for 1996 have consisted primarily of furniture and
fixtures and information technology hardware. Additional technology purchases in
1996 will consist of new software, additional computer equipment, and
telecommunications equipment. The Company will also continue to replace delivery
vehicles as needed.
The Company currently has no plans to expand geographically in 1996; however,
the Company will continue to search for geographic locations that would
complement the existing infrastructure. If another location were to be opened in
1996, the Company would fund the startup expenses through its lines of credit.
In the second quarter 1996, the Company negotiated increases in its lines of
credit. The Company now maintains a $5,000,000 working capital line of credit at
a commercial lending institution that allows the Company to borrow up to 80
percent of the book value of eligible trade receivables plus the lessor of 40
percent of eligible inventory or $1,500,000. As of July 31, 1996, there are
advances outstanding under this credit facility of $4,477,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $523,000
as of July 31, 1996. The Company also maintains a $550,000 capital equipment
credit facility providing for borrowings at 80 percent of cost on purchases. The
advances outstanding under this credit facility as of July 31, 1996 were
$178,000. Both credit facilities are payable on demand and bear a variable rate
of interest computed at the prime rate plus one-half of one percent.
Management believes, that based on its equity position, the Company's current
credit facilities can be expanded during the next twelve months, if necessary,
and that these facilities, together with cash provided by operations, will be
sufficient for its capital and liquidity requirements for the next twelve
months.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. Legal Proceedings --
The Company was named as a defendant in a product liability lawsuit filed in the
Superior Court of the State of California for the County of Los Angeles -
Central District (Placido Alvarez vs. Abatix Environmental Corp., et al, Case
No. BC133537). The Company has requested and received (1) indemnification under
the manufacturer's product liability insurance and (2) legal representation at
the cost of the manufacturer. As of July 31, 1996, no depositions have been
taken, therefore management is not able to assess the merit of the plaintiff's
case. However, the Company does not anticipate any material impact on its
financial statements as a result of this litigation.
Item 2. Changes in Securities -- None
Item 3. Defaults upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information --
Effective July 15, 1996, the Securities and Exchange Commission issued an order
granting the Company's application to withdraw from listing and registration on
its Common Stock, $.001 par value on the Boston Stock Exchange, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
Exhibit 11 - Computation Re Per Share Earnings for the three and
six month periods ended June 30, 1996 and 1995.
Exhibit 27 - Financial Data Schedule for the three months ended
June 30, 1996 (filed with the Company's electronic filing only).
(b) Reports on Form 8-K --
There were no reports on Form 8-K filed for the three months ended
June 30, 1996.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial and
accounting officer by the Registrant.
ABATIX ENVIRONMENTAL CORP.
(Registrant)
Date: August 8, 1996 By: /s/ Frank J. Cinatl, IV
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Computation of Re Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average shares outstanding:
Primary:
Common shares outstanding, beginning of period 2,088,964 2,319,748 2,159,214 2,319,748
Weighted average number of shares issued 1,444 21,566 7,833 14,937
Weighted average number of shares acquired - (121,556) (58,735) (92,528)
Dilutive stock options and warrants, based on the treasury
stock method using average market prices 55,795 22,128 50,067 19,784
------------ ------------ ------------ ------------
Total 2,146,203 2,241,886 2,158,380 2,261,941
============ ============ ============ ============
Fully Diluted:
Common shares outstanding, beginning of period 2,088,964 2,319,748 2,159,214 2,319,748
Weighted average number of shares issued 1,444 21,566 7,833 14,937
Weighted average number of shares acquired - (121,556) (58,735) (92,528)
Dilutive stock options and warrants, based on the
treasury stock method using the market price at the
end of the period if higher than the average market price 60,194 22,128 61,167 23,661
------------ ------------ ------------ ------------
Total 2,150,602 2,241,886 2,169,480 2,265,818
============ ============ ============ ============
Earnings:
Earnings from continuing operations $ 271,515 $ 361,488 $ 479,249 $ 476,362
Earnings from discontinued operations - - 21,545 -
------------ ------------ ------------ ------------
Net earnings $ 271,515 $ 361,488 $ 500,794 $ 476,362
============ ============ ============ ============
Primary earnings per common and common equivalent share:
Earnings from continuing operations $ .13 $ .16 $ .23 $ .21
Earnings from discontinued operations - - .01 -
------------ ------------ ------------ ------------
Net earnings $ .13 $ .16 $ .23 $ .21
============ ============ ============ ============
Fully diluted earnings per common and common equivalent share:
Earnings from continuing operations $ .13 $ .16 $ .22 $ .21
Earnings from discontinued operations - - .01 -
------------ ------------ ------------ ------------
Net earnings $ .13 $ .16 $ .23 $ .21
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996, AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 39,621
<SECURITIES> 0
<RECEIVABLES> 6,677,213
<ALLOWANCES> (399,528)
<INVENTORY> 4,167,406
<CURRENT-ASSETS> 10,784,776<F1>
<PP&E> 1,653,336
<DEPRECIATION> (1,056,835)
<TOTAL-ASSETS> 11,595,369
<CURRENT-LIABILITIES> 7,050,566
<BONDS> 0
0
0
<COMMON> 2,379
<OTHER-SE> 4,542,424
<TOTAL-LIABILITY-AND-EQUITY> 11,595,369<F2>
<SALES> 16,685,751
<TOTAL-REVENUES> 16,685,751
<CGS> 12,046,464
<TOTAL-COSTS> 12,046,464
<OTHER-EXPENSES> 3,739,459<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,383<F4>
<INCOME-PRETAX> 746,445
<INCOME-TAX> 267,196
<INCOME-CONTINUING> 479,249
<DISCONTINUED> 21,545<F5>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500,794
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<FN>
<F1>AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2>INCLUDES THE COST OF 287,350 COMMON SHARES IN TREASURY OF $847,564.
<F3>INCLUDES A SPECIAL CREDIT OF $56,711 FROM THE REVERSAL OF PREVIOUSLY
RECORDED CHARGES (SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS).
<F4>INCLUDES INTEREST EXPENSE OF $154,521 AND OTHER INCOME, NET OF $1,138.
<F5>AMOUNT REPRESENTS THE REVERSAL OF PREVIOUSLY RECORDED CHARGES (SEE NOTE 2 TO
THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
